Output level would be efficient

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Reference no: EM1315507

Q. Assume which there are three firms, A,B also C, located next to each other. Every unit of output which firm A produces creates a benefit of $7 for B also a cost of $3 to firm C. A's cost function is given by C(x) = 2x^2 + 1, where x denotes firm A's output. This output is sold in a competitive market at a price of $16. Assume which the market price accurately reflects the marginal benefit to the rest of society (i.e. without firms B also C) of consuming each unit.

a) Illustrate what total amount of output will firm A produce in a competitive market?

b) Which output level would be efficient?

c) Assume the government imposes a tax/subsidy t per unit of firm A's output. Illustrate what tax/subsidy would implement the efficient allocation?

d) Assume which firms A also C merge also then choose the output level which is best for them. Illustrate what would the output be? Does the merger improve efficiency? Illustrate what would now be the optimal tax/subsidy?

Reference no: EM1315507

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